All Forum Posts by: Hollis Cook

I'm looking at a property that is 3 single family houses and 1 efficiency on 2 acres. (Seller was asking $369k with no offers, will accept (verbally) $340k and will refund $6k in closing costs and $15k for repairs, $319k to seller, $21k to me, 10%down--$34k). There are two nice houses that need minor repairs, currently owner occupied, estimated to bring in $1,100 (2/2) and $1,300/month (4/2). There is a single family (small, old, 1947 1/1) that is currently rented for $650, but the tenant has trashed it, has a motorcycle INSIDE, which the owners have allowed, needs a total interior rehab, estimate is $10k, but... he is a long-term paying tenant and wants to stay. My thought is why kick out a paying tenant, when I can defer the rehab cost and it's already trashed anyway. I would only do exterior repairs, estimated at $5k (Estimate for interior and exterior rehab is $15k). Much the same, there is a very small efficiency, total rehab inside and out needed. Long-term, good paying tenant wants to stay at $450/month. $10k total rehab estimate, $5k exterior/$5k exterior, I would plan to do exterior only, for $5k estimate and leave her in there. My questions: Is it wise to only do exterior rehabs and leave the good-paying tenants. I could kick them out, do the full rehab and end up with a bad tenant(s) and have to rehab again anyway. If those two tenants are willing to live in dumps, why should I care? I plan on selling in four years, for all I know, they'll still be there and I'll never have to do the interiors. How do I calculate in that I may have another $15k in interior rehab expenses coming down the line? They've been there for years, won't be able to find rentals at the price their paying in this market, and they both seem to be happy living in dumps. What are my potential downfalls? Thanks!

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Please explain: (Vero Beach, Indian River County, FL) $340k purchase price, 3 single family and 1 efficiency (not permitted) on 2 acres. Seller refunds $6k in closing cost, $15k in repairs, total net to seller $319k. DP 10% ($34k). Monthly income $3750, monthly expenses $3167, monthly cash flow $582, C on C ROI 20.57%, that seems good, but when I click on the 50/50 rule, monthly cash flow is only $324.54. Does this mean my expenses that create the $528/month are too low? With cash out pocket of $34k, $324/month is fairly decent ROI, but which number is correct (or should I rely on)... my estimated expenses or the 50/50 rule? Also, if I use the 2% rule my income is WAY off, based on the selling price of $319k OR $340k. Why such a big difference in the 50/50 compared to the 2%? Thanks!

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Originally posted by @Michael Rossi:

Chaz,

The 50% Rule is nothing more than the historical average of operating expenses throughout the United States. If it were possible to use the actual expenses for a property, I would do that. Unfortunately, that is nearly impossible. Most residential rental properties in the United States are owned by mom and pop type owners. The have one, two, or a few rentals. Most of these owners don't have the slightest idea what their operating expenses are, and they certainly don't have detailed records going back many years. It is also true that the vast majority of newbies don't make it in the rental business and therefore there is a continuous turnover of rentals.

Since there is no way to determine the actual expenses for a property you're looking at, then the best way that I've found is to use the 50% rule, which simply means that you're assuming the operating expenses over time will be 50% of the gross rents. I have found that this is an accurate number but you should understand that expenses will vary for any particular unit in any particular year.

For example, I have one house that has had the same tenant for the past 4 years. In the first year, I replaced the water heater, but in the next 3 years I have had absolutely no maintenance. Should I conclude from looking at this house that vacancies are zero and maintenance is almost non-existent? My operating expenses for this house over the past 4 years have been lower than 40%.

On the other hand, I have another house that has had two horrible tenants in the past two years. The first tenant was an RN who allowed a friend to sell crack from the house. When it was raided by the drug task force, a LOT of damage was done. The front door was broken down; the NEW carpet was burned by the concussion grenade; all the light fixtures were torn down; the outlets were ripped from the walls; and all of this was in addition to the damage done by the tenant. Next, I had a Section 8 Tenant in there that lived like a PIG - a very lazy pig whose very last ambition in life was to clean. She and her teenage swine children destroyed the place again. All the new carpet is ruined. The front door is broken. The walls will need to be repainted. It is just simply a disaster. Should I conclude from this incident that operating expenses on SFHs in my area are 65% per year?

Of course, the answer in both cases is no. The operating expenses average 45% to 50%. That is the 50% "Rule". It just says that your operating expenses will run about 50% of the gross rents.

One more thing while I'm on this topic. The 50% Rule assumes that you are doing everything right as a landlord. The data behind these numbers comes from the large apartment associations, where you have a high percentage of professionals. If someone is making a bunch of landlording mistakes (like letting the tenants go months without paying or not screening the tenants), then obviously the operating expenses will be MUCH higher!

Hope this makes it a little clearer.

Mike

I had one HORRIBLE tenant, a "real estate agent" with good references, which turned out to all be his friends and family (collected by my ex LAZY real estate agent who wanted the listing on the property). The tenant turned out to be a professional squatter and knew how to play the system. He paid a deposit and one month rent and never paid again, it cost me $6,000 to get him out. I had to literally WRITE HIM A CHECK TO LEAVE, (I was lucky I didn't get arrested in the driveway when I had to hand him the check.) I freaked out, became real estate skittish, and even though the property had been profitable for three years prior, I sold it at a tremendous loss and haven't re-invested since (8 years). I'm getting back into real estate now, have a great inspector, a fantastic agent, who negotiated an excellent deal on my own house, 40k in equity in 16 months, I joined BP, and have become a due-diligence fanatic, so I will hopefully NEVER make the same mistakes again.

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I'm BRAND NEW here, so nice to meet you and thank you for the Partner Request--that's one of the reasons I joined. As you know, I'm in Vero as well. Would be happy to help with this property/mystery, if not already solved. I'm not a poacher!!, but you'll have to trust me on that. I just LOVE real estate and digging into abandoned properties is one of my favorites. I'm new to Vero, MUCH different market than West Palm, which has already bounced back and the explosive Median home prices have once again priced people right out of the market. I'm not complaining to much because it benefits a property I still own there, and I'm not looking at that market anyway, but it makes Vero MUCH more fun. So many houses, so little time!!! I have a great Broker I work with, but would love to create a non-competitive circle of people we can call on for advice... lenders, contractors, etc. I just completed ownership of a forty-year partnership (passed down in my family) of an industrial building in Massachusetts, which provided fantastic income and never left me with lending problems. As such, I'm in new uncharted territory and am currently seeking a lender that will consider "future rental income" on a property I'm looking at that my own income won't cover. (Three single families on two acres, one currently rented, two currently occupied by owner (i.e., no rental records), one unoccupied efficiency, no rental records) It has GREAT! ROI numbers, but I need a bank that will take future/anticipated income into consideration (WITH 20% down, good credit, and decent net worth, plenty of cash on hand). So that's my current dealio. Because I'm a BiggerPockets newbie, help with WHERE on this site to post this need, would be much appreciated. Thanks again for Partnering, hope to hear from you again soon. Text is best method to get my attention! (I've entered my cell number on my profile, I assume there's a link to be clicked to IM me... I hope.)

Cheers,

Hollis ~

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All Forum Posts by: Hollis Cook

Hollis Cook has started 2 posts and replied 14 times.

Post: Good tenants, living in DUMPS... let them stay?

Post: 50% rule and the 2% rule

Post: 50% rule and the 2% rule

Post: Looking for a help/partner in Vancouver BC